Hidden Drawback to Indexing

As 2023 comes to an end, we look back at what transpired in the financial markets throughout the previous year and share our thoughts moving forward.

In light of the recent events surrounding the current banking industry, we share an article written by Charles Schwab regarding their perspective on the matter. 

As the year 2022 comes to a close, we recap on some of the highlights from the past year and give thoughts looking forward into 2023.

As we begin this update, Hurricane Ian is bearing down on the state of Florida expected to wreak havoc and destruction and we realize that investing is a lot like a hurricane.

The unfortunate convergence of several factors is driving consumer inflation to its fastest increase since December of 1981 as evidenced by the 8.6% year-over-year increase for May.

As a follow-up to the Market Comment we sent out to you on February 24^th, we felt there were a couple items worth discussing.  It has now been two weeks since Russia most recently invaded Ukraine bringing about significant devastation to the country and their people.

The current Russian invasion of Ukraine will create a great deal of uncertainty and speculation.  We can expect there to be ripple effects through the energy markets, investment markets, and possibly the European economy to a limited degree.  At present, this remains a regional conflict whose global impact is likely to remain limited.

The current bout of price volatility in the financial markets reminds us of March 2020 during the onset of OVID where we saw the market averages decline 30-35% in a matter of weeks. Although the current environment is not nearly close to that experience percentage wise, it can still be quite unsettling during the short term.

It is becoming more evident each month that our world may never be the same as it was a mere two years ago. The arrival of the COVID 19 virus and its mutation into the Delta virus and most recently Omicron seem to take us back one step for each that we’ve moved forward. Although science and the pharmaceutical companies will most likely provide vaccine protocols to eventually reduce the danger of this virus to flu-like statistics, the way many of us work and live has changed forever. Stay at home schooling, working from home, restricted traveling and entertainment all have taken their toll on us as social human beings. On the other hand, the popularity of Zoom meetings online as well as online education courses have allowed us more free time in our daily lives to pursue other interests and family time.

Recent market trading may be signaling a change in investor sentiment. Retail investors have been buying individual stocks lately at a record pace. The lack of sports, concerts, and other activities due to the virus lockdowns have left plenty bored and looking for something to do. The stock trading fee wars have produced multiple trading firms that allow trades as little as $20 with little or no fees. This has led to an astounding number of people using their government stimulus checks to buy stocks as if they were in a casino hoping for big hits.

It is said that long term secular bull markets in stocks last 15 to 20 years. The previous runs lasted from 1949 to 1966 and from 1982 thru 2000. Of course, these periods were not without interruptions of short-term corrections along the way.

Since our last communication in March which touched on the potential impact of positive news on equity markets, the U.S. financial markets have staged a dramatic recovery coinciding with the gradual positive developments on the coronavirus and economic fronts. Although there is still a considerable amount of ground to make up to reach the previous market highs of February, tremendous progress has been made since the March lows. During our forty years in business, we have never witnessed a period of extreme volatility such as this. The following chart and accompanying statistics put the decline and ensuing recovery into perspective.

Economic decline caused by lockdowns due to the Covid-19 virus is being confronted on a number of fronts. Congress has recently agreed on another stimulus bill that will help individuals and businesses to the tune of $900 billion.

The Federal Reserve is also optimistic and in a recent meeting said that the economy has potential for strong growth in the latter part of 2021. The Fed left interest rates unchanged at their current low rates and stated it remains committed to doing whatever it can to ensure a strong recovery.

As we enter the Christmas holiday season we give thanks for the client relationships made over the years and appreciate both your business and friendship.

We have always prioritized the wellbeing of our clients. This year during the COVID Pandemic is no different. After much thought, and out of concern for the health and safety of our clients, we have decided to forego our Annual Holiday Champagne Brunch for this year.

In the two week period from July 23rd through August 7th, the Dow Industrials and S & P 500 declined about 4.5%. Headlines touted this as the beginning of the next major decline from the current record highs. Novice investors headed for the exits selling not only equities, but also high yield (Junk) bonds. It seemed as though the rout was on.

It boggles the mind how so much has happened in such a short period of a couple of months. From the start of a rather benign year in which the U.S. economy was continuing to chug along and unemployment at its lowest levels in decades came the multiple slaps of the Covid-19 virus, a worldwide oil price collapse, economic shutdown, protests against police and volatile riots and looting shops and stores across the nation. Divisions on multiple subjects have split the population in historic number. Hopefully, cooler heads will prevail on both extremes and we can come together as a nation in a peaceful manner.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 was signed into law by President Trump on Friday, March 27th after several days of tense negotiations within Congress. The Act is an estimated $2 trillion package including nearly $500B in individual rebate checks, another $500B for support of several severely damaged industries, nearly $400B support including tax credits for wages and payroll tax relief, over $300B of support for state and local governments, and almost $150B for various initiatives to support hospitals and the health care system. Below is a summary of provisions we felt most relevant to you.

On a positive note it appears that the day to day selling is getting less severe as bargain hunting buyers are starting to make an entrance, according to the underlying indicators. The deaths in China appear to be in dramatic decline and in Japan and South Korea they have actually resumed practice baseball games. Stores and restaurants are also returning to normal in China including big names such as Apple, IKEA, and Starbucks.

This past Sunday, Ohio Governor Mike Dewine instituted a “Stay at Home” order requiring all non-essential workplaces to cease operations as of 11:59pm tonight. Lesjak Planning offices, deemed an essential workplace by the order, will remain open to address your ongoing service needs while also maintaining our daily operations. Our ongoing monitoring and review of your portfolios, investment markets and money managers will continue as well.

The U.S. Government, along with other governments around the world, is taking unprecedented steps in hopes of containing the Coronavirus and its impact on our society. Social distancing strategies are effectively grinding the economy to a halt as individuals and families forego most discretionary spending and businesses adjust to altered workforces.

Since World War II, there have been 11 U.S. economic recessions, 12 Bear Markets, and 23 U.S. equity market corrections of at least 10 percent. The catalyst for these declines includes geopolitical events, terrorist attacks, credit market collapses, and various asset bubbles, among others. The underlying cause of a significant decline in economic activity or equity market prices changes throughout history, but the stages we experience through those declines remains the same. As we have mentioned often in past commentaries, Uncertainty for the equity markets leads to Fear, which ultimately results in significant short-term volatility and temporary price declines. These events are, in part, exacerbated by the relentless barrage of media sensationalism.

This past week we have witnessed the significant decline in the market indexes in response to fears of repercussions to the world economy from the spread of the coronavirus. As in almost every sharp market decline of the past, fear commands the human emotion to panic and in the case of investing, sell now and ask questions later. More recently as technology makes trading simpler and allows mathematics to control trading decisions, market moves are quicker in either direction.

History will document that 2019 brought us above average investment returns in most sectors, and also brought worldwide trade wars, political infighting, natural disasters, well known corporate closures, major technological advancement in communication and medicine to name a few. The U.S. economy is continuing to expand at a moderate pace and unemployment numbers are at record lows. As long has been the case, consumer spending is what is keeping the economy growing. The share of internet sales continues to rise versus the big box store sales. What is bought, how it is bought, and how it is paid for is changing minute by minute. Consumers are clearly spending their pay at a healthy clip creating the jobs that keep the economy humming.

Recent developments in the financial world have led to significant discussion regarding an Inverted Yield Curve and a looming recession. Equity markets around the world responded with a decline in prices. Economists, former Federal Reserve Chairpersons, market pundits, and every individual that can get in front of a camera are offering their opinions – some are qualified and some are not.

As the year 2018 comes to a close, we reflect back on the past forty years that we have witnessed first hand in this investment business. What stands out most vividly in memory were the major declines. Most of us that experienced the “crashes” in 1987, 1990, 2002, and 2008 would agree that in each decline there was the feeling of dread for what each new day would bring. Coinciding with each crash was either political turmoil, global tensions, or some type of financial industry corruption. In more than one instance, it was all three. “Financial analysts” on television grabbed the limelight with prognostications of markets going to zero as markets imploded and the world falling into the abyss. Quite scary times to be an investor.

The term “climbing a wall of worry” has been used for decades to describe how stock markets continue to rise in value as negative events, both domestic and worldwide, dominate the news. This seems to be the case this year as negative news monopolizes our daily lives including: tariff threats with our international trading partners, polarized political infighting here at home, Brexit struggling again, and recently immigration issues. Equity markets have run up to new highs right into October.

Something very interesting has been happening to the S&P 500 Index. It has just completed an unprecedented string of continuous records. The index closed at new highs each day of the past week, each week in the past six, and each month in the past seven. Never before has this feat been accomplished.

As we pass the midpoint of 2018, cross currents are evident in every market sector as well as worldwide which continues to keep investors on the sidelines. Even professional money managers have cash holdings in excess of the 10 year average. It seems as if the overwhelming consensus is that the equity markets are bound to have a major decline. Cash is being hoarded at next to nothing returns waiting to swoop in and buy shares more cheaply after the supposed decline.

Markets reached new all-time highs in January with almost non-existent volatility that lasted over fifteen months. Money flowed into stock investments in record numbers as the new year began. It all changed abruptly.

The economy here in the States, as well as the rest of the developed world, continues to improve. In the fourth quarter of 2017, 70% of all companies reporting beat their earnings forecasts and nearly 72% beat their revenue forecasts.

Over the years we have all seen the equity markets rise, fall, then rise again. Our lives inevitably change due to circumstances beyond our control. At times, it may seem there is not much that we do actually control at all. That is why we set goals, look to the future, formulate a plan.

As we reach the halfway point of 2017, we can summarize the year as being positive so far. In terms of the various markets, results have been on the positive side for most sectors. Except for the one day in May where the Dow Industrials dropped over 350 points, the equity markets have gradually climbed without any sustained declines. Large company stocks have gained about 9% year to date, Small company issues 2%, and Technology 16%. The commodity sector has experienced consistent declines as inflation continues to stay subdued and supplies plentiful. The grains remain cheap, precious metals remain well below their highs of last year, and oil has recently declined about 30% in the past month or so due to oversupply.

While the first smartphones were actually created in the late 1990’s, it wasn’t until 2007 that Apple famously unveiled its first iPhone and revolutionary touch display. The ten years since saw the smartphone become intertwined with our daily lives because of ingenuity and seemingly limitless applications. It is estimated over one billion smartphones were sold worldwide in 2014 alone.

We would like to take this opportunity to wish you a safe, healthy, and prosperous New Year and to recognize and appreciate the relationship that we have with you. Your family’s well-being and financial progress is the cornerstone of our commitment, which we take very seriously. Change has been a constant during our time together and if there’s one guarantee we can make, it is that the future will continue to evolve both here at home and also worldwide in ways we have yet to imagine. It is this change that we find so exciting, as a challenge to stay on the cutting edge of strategy, technology, and service.

By keeping interest rates near zero for such an extended period, The Federal Reserve has forced the large population of savers to look for returns in more aggressive areas. Those savers, which as a percentage are mostly retired, simply cannot get by when their income has been reduced to nearly nothing from the average 4-5% returns of prior decades.

There really is only one way to properly describe the present environment – Normal. Take into consideration some of what is going on around the world right now: international conflict (ISIS, Eastern Europe, South China Sea just to name a few), economic instability (Brexit, European Union, Japan, Emerging Markets), and political uncertainty (U.S. Presidential Election).

Often times you will hear us state that we make recommendations within the context of your financial plan and comfort level. It is a basic tenet of our overall philosophy because, quite simply, achieving your goals and placing your interests first matters the most to us. However, this is not new to our firm, but rather a philosophy embraced by our founder, John Lesjak, almost 40 years ago. Below you will find excerpts from an article John wrote in 1977 that we find timely, informative, and reflective of how we feel financial planning should be provided.

The recent decision by the people of the U.K. to back out of the European Union is historic, only in that they are the first to leave the relatively young collaboration of countries. What makes it similar to other events in history is that a group of people are choosing to separate from a larger consortium to gain greater autonomy regarding trade, immigration, currency and economic policies.

Market pundits, financial news stations, and even major brokerage firms seem to be trying to create a self-fulfilling prophecy by continuing to warn of a coming financial Armageddon. For nearly the past year we have been pounded continuously about the coming crash as a result of (take your pick): The Presidential race, banking crisis, recession, war in the Middle East, inflation, and the crash of oil prices.

When markets decline or rise in a spectacular fashion, we attempt to try to figure out if there is a way we should have anticipated or seen this and if there is, what action could we have taken. Can the way the markets move at any point in time actually tell us anything?

Santa decided to skip the much anticipated year end “Santa Rally” in the stock market. As usual, markets rarely give what is expected. The volatility in December was unprecedented in that 21 of the 23 trading days saw the Dow Industrials move more than 100 points either up or down. Right out of the gates, the first week of January brought us the failed China circuit breaker experiment. China’s officials implemented new rules in their markets that limited declines to 5% before the markets closed for 15 minutes. Once re-opened, if prices fell another 2% to a total of 7%, markets closed for the remainder of the day. During the first two trading days their markets were open a total of 30 minutes each morning before the 7% breaker was reached. The third day, officials scrapped the plan and trading settled down. So much for trying to manage markets to try to limit losses.

Most investors would have to agree that staying with a long term, logic-driven investment plan during periods of high volatility is not easy. As recently as 2009 while the markets continued their free fall, those investors that could not take the stress any longer threw in the towel and sold out. Almost immediately, as the last sellers exited, equities began their six year run to record highs. As new highs were being toppled on a regular basis, these same investors jumped back in with expectations of continued growth at the previous frantic pace.

It has been quite some time since we have experienced as volatile a week as we have in the one just passed. For the past twelve months it looked as though the markets were in an “internal” correction. While the major market indexes were remaining within a couple of percentage points from their all-time highs, the broader market was reacting quite differently. Of the 4000 publicly traded stocks, nearly 45% were down more than 20% from their highs. And 24% of all stocks were down more than 40% from their highs. This was all before the selloff that began last week

We have reached the halfway point for 2015, and if you look at the indexes, most are about where they were at the beginning of the year. Dow +1.6%, S & P 500 +3%, Transportation Index -7%, Utilities -8%, and Corporate Bonds -1%. Bucking the trend is the Smallcap Index +6.5%, the Nasdaq sector +9%, and the International Index at +7%.

The volatility in the equity markets continues to be present as we alluded to in our February Comment. What is interesting is that this year to date, the leading sectors have flip-flopped from those of the last quarter of 2014. Small and Mid Cap firms are beating the Large Cap stocks at this writing about 6% compared to 2% year to date. The stronger dollar is affecting the exports of the large multinational firms and hurting their bottom line. The smaller companies are not as much affected since most of their sales are in the U.S.

As tax season quickly approaches, the scramble begins to organize the reams of paper and forms it takes to prepare a return. Add to that frustration the news coming from the IRS that due to budget cuts, their service will be very poor this year and refunds will be delayed, and you get the feeling the system is broken.

This year has provided many wake-up calls to those that think they know in advance what will happen in the investing markets. Trying to time highs and lows is a lesson in futility.

For the past year or so we have opined that we are in a secular bull market which may very well have many years left to run. It has also been stated that during these cycles market values tend to correct every four or five years. Since the beginning of this year the expectation of a 10-12% correction happening sometime this year was very real due to historical odds. With volatility returning to the major market indexes this past week, the question quickly has turned to “are we in a bear market”? To be sure, market moves of more than 1.5% both up and down every day since last Tuesday, investors have become very nervous. In actuality though, the S & P 500 is down 6% from its all-time high less than one month ago.

What a difference a month or so makes in the markets today. Towards the end of May, we printed that the small company stocks and technology were taking a beating in relation to their larger issues. Since then, the smaller caps have raced back near their all-time highs.

At this time of year regulations require that hard copies of specific data relating to our firm and your privacy be provided to all clients. Our Ethics statement, Privacy practices, and any material changes to our business model are enclosed in this mailing.

The volatility we have seen in the markets over the past month can be chalked up to what analysts call “sector rotation” This occurs when one sector that has generated large gains over the recent period suddenly becomes overvalued in the eyes of traders, and is sold off in a concerted effort to lock in profits. These periods of momentum can last for months or years until, without warning, they are hit hard by profit takers.

Equity markets here in the States have recently reached all-time highs once again. The time for the naysayers has begun again with predictions of another major decline in stock values. The analysts we follow and communicate with do not see a significant drop in the near future. In fact, the next few years look quite positive to the majority that we talk to. No one ever knows for certain what short term gyrations will occur. The following excerpt taken from one of the greatest investors of our period is very timely. We hope you enjoy the comments.

As another year ends, we look back and reflect on a year that many thought would be tough for the markets. Equities started off the year moving higher and except for a slight pullback in June due to the Federal Reserve’s comments about stopping their quantitative easing program, continued to make new highs right into this year’s end. Declines due to worries over inflation, Syria, Iran and the various political scandals never materialized leaving the majority of investors sitting on the sidelines missing the year’s gains.

History once again repeats itself. Just like the previous 17 times that the government went down to the wire on a monetary shutdown this time was no different. Just before midnight on Wednesday the President signed the bill to re-open the federal government and increase the debt limit. At least for 90 days. After grandstanding in front of the television cameras for the past two weeks, Congress miraculously comes to a weak agreement to again kick the proverbial can down the road. The American people have seen this movie too many times and appear to be signaling that just maybe they’ve had enough.

As we come into the month of September there is continued reason for caution in the short term. From the high of 1,700 on the S & P 500 index on August 1st, we have seen a decline of about 4% down to 1,632 on August 30th. Trading has been listless with fewer trades even on the days where values are up.

Our last e-mail just a little over a month ago commented on the fairly quick rise to new highs in the stock market. It is looking like our Federal Reserve Chairman, Ben Bernanke, began to feel like the rise to new highs was a little too quick. We have heard that the timing of last week’s Fed meeting comments suggesting that he may soon taper off the buying of bonds, which has kept interest rates low, was meant to bring market levels down a bit. Obviously with China’s economy slowing and ours just barely chugging along, there is zero chance that the Fed will actually stop pouring money into our economy any time soon.

Equity markets are in the news daily again since they have reached new highs. All of the attention is bringing comments of caution from investors who have been burned after seeing major corrections from previous market highs. For reasons that we have mentioned in previous communications and also in this letter, there is strong evidence that prices can move much higher. This optimism though, does not keep us from continuing to explore new ideas for investing and diversifying to help reduce volatility looking forward.

On Tuesday, the Dow Jones Industrials eclipsed the 15,000 level for the very first time. It has been 1,044 trading days since the market bottomed at 7,000 in March of 2009. This four year climb was accomplished much quicker than the last climb from Dow 7,000 to 14,000 which occurred over 2,621 trading days from 1997 to 2007.

It is inevitable that when prices in any investment market make new all-time highs that talk from the so-called investment experts turns pessimistic. While it is prudent to take a good look during these times at the market metrics and valuations regarding risk, turning gloomy is not always warranted.

Today the Dow Jones Industrial average made a new all-time high at 14,253. To many technical analysts, this was the last hurdle that needed to be reached to confirm a new bull market. Lucky for us, that this is now official. The four year run from Dow value 6,547 in March 2009 producing a gain of 120% must have been just a warm-up we assume.

Maybe, just maybe we are emerging from the “lost decade” in which equity markets have struggled as investors have held onto their cash. This long period of stagnation benefitted bondholders as the Federal Reserve reduced interest rates to practically zero in the attempt to get buyers back into real estate with low interest loans.

The elections are now over with the president winning with 3% more of the popular vote than the challenger. The House of Representatives keep their Republican majority and the Senate keeps their Democratic majority. Voters have opted to keep this split in power and it should be a clear message to our elected leaders to put aside their strict adherence to party lines, compromise and make the tough decisions that will be needed very soon to get our economy growing again.

We thought it would prove useful to provide the results of recent conversations with and observations of some of the leading money managers and analysts regarding the current investment climate and their views on getting the U.S. economy rolling again.

We are unable to pick up a newspaper or turn on the television without being hit with depressing economic news here at home and overseas. Bankruptcies by cities and states grow in number each day and bailout requests of entire countries continue to take front page in the news.

It seems as though perception and reality are coming to a head across the world. For much of this year these views and the wide disparity between them have caused economies to stagnate, according to many respected experts.

Beginning with the “too big to fail” banks and corporations a few years ago, the bailouts are spreading to complete countries today. The common denominator between them appears to be the perception that irresponsibility in the governing and management of those entities does not result in repercussions that affect their futures. Should those that mismanage through lack of skill or criminal fraud be allowed to be bailed out and given a fresh slate?

Last month’s Wall of Worry that we commented on grew into a mountain this past week as the Volatility Index (also known as the Fear Gauge) spiked to its highest level in 13 months. A mere three months ago, the index was at a four month low. Investor emotions change very quickly.

Almost immediately after we wrote last month’s comments about the markets unprecedented seven consecutive week decline, they turned on a dime and charged straight up for two weeks and an 8-10% gain.

After the Dow Jones Transportation Index recently hit new all-time highs, the technical analysts that we follow stated that if the Dow Jones Industrials broke through 12,800, a new all-out buy signal would be generated. On July 7th the Industrials topped out at 12,719 (please refer to the graphs).

Prominent market analysts had the opinion that the old investor adage of “Sell in May and go away” would not apply this year due to strengthening market conditions as June approached. We all know what was bound to happen.

Some negative news about economic growth slowing, gas prices rising, additional weather related destruction, and the re-emergence of Greece’s debt woes turned investors moods negative overnight. How amazing it is that our society embraces negative news so quickly and replaces any good news and optimism with worry and despair.

While the death of Bin Laden made the news on all levels last week, the spectacular decline in commodity prices also made headlines. Silver was down 25%, gold down 5%, and oil down 15%. All were well above their 200-day moving averages and a buying mania seemed in progress. Oil was reaching its levels last seen in 2008, at $115 per barrel, and we know that ended by sending prices down to the $40 per barrel level. Speculation still runs amok in these sectors often with no substantial reason backing their rise.

The tragic events in Japan on March 11th and the subsequent nuclear reactor problems are presenting difficult challenges. Initial reports indicate that Tokyo and the remaining southern portions of the country did not incur significant damage. However, the northeastern city of Sendai, which accounts for 1.7% of Japan’s GDP, has sustained a substantial amount of damage, the full extent of which remains uncertain.

As January goes, so goes the market for the balance of the year, some pundits claim. As of this writing the S&P 500 Index is up 2.5% for the month, so is a nice up move in the making for 2011? Maybe, but for the year 2010 the S&P finished with a positive return of 15% even though its January started with a decline of about 3%.

Coming off of what will most likely go down as a historic mid-term election; Congress and the President have a bipartisan agreement on taxes. While the agreement does keep the current tax structure in place, the issue will have to be taken up again in two years.

We revisit these past descriptions of the state of the U.S. economy because investors’ outlook today is just as pessimistic…which may be too extreme. The quotes above have a consistent theme with today’s environment where the country is going down the tubes. The demise has been averted in the past, will this be the time?

Even though the U.S. economy continues its tug-of-war as it gains footing out of the most recent recession, an opportunity is presenting itself to many current homeowners. Almost two years ago the Federal Reserve began an effort to help keep home mortgage rates down to aid the struggling housing market. This sparked increased home purchases and a wave of refinancing at the time. Mortgage rates eventually climbed back up, but have recently declined back down to historically low levels. This is providing a second opportunity for current homeowners who did not take advantage of the refinancing last time around.

Normally the summer months provide lethargic trading in the financial markets. Vacations are taken by many traders worldwide and volumes slow considerably. The past few weeks have pretty much followed suit. The result often is wide fluctuations in market prices since a one day or one week concentration on the buy or sell side is met with little resistance.

After a historic and relatively uninterrupted 14-month rally the investment markets have hit a rough patch. There are a few factors that have led to this most recent rough patch with the main factor being uncertainty.

Well, it’s official…this past decade has been dubbed “The Lost Decade.” As measured by the S & P 500’s anemic negative .95% average annual return, the past ten years have performed the worst since at least the early 1800’s.

High quality active managed funds outperformed the indexes by a wide margin over the same period. Asset allocation that included bonds since 2000 performed even better yet.

The last email blast in July was titled “Too Bearish on Equities?” Our analysis was suggesting at that time that the overall sentiment of novice and professional investors alike was that we were due for a second leg down in the markets. Since then the S&P 500 and the Dow are both up 15%.

This mini bull market we have been riding for the past three months has continued to surprise many with its longevity. For a couple of months now market experts have been warning about a second wave of financial problems and economic weakening. Just maybe they are being too bearish.

Having a plan and adhering to it can make getting through these times a lot less stressful. Are We Headed in the Right Direction?

Since the low point of March 6th, the S&P 500 Index has had a nice gain of over 20%. The action of the rise, defined by volume and advances verses declines, has indeed been very strong and positive. More than a couple of the daily moves have been unprecedented.

Our research shows that this may very well be one of the best opportunities in the past 40 years to own quality companies.

The Advisor - Spring 2009

The current market spiral we are experiencing is being driven by a loss of confidence in our financial markets and our country’s leadership. Job losses lead to decreased consumer spending while tight credit markets and reduced consumer spending lead to reduced capital expenditures and layoffs by businesses. These are basically feeding off of each other at this time. Shares of quality companies are being sold in an attempt to try to sidestep further declines in value.

Recently, we discussed the bottoming process that takes place during major market declines. The current market decline, and the events of this past week, continues to follow the historical blueprint as we are now testing the lows reached on November 20th, 2008. Finding support at these price levels, for a second time, is an important step for the stock markets to move forward. The media, in all its wisdom, is more so compelled to report to us how the stock markets have retraced their values back to 1997 levels.

This seems to be the question of the day and one we will attempt to answer. With the major news focusing on the economic numbers and congressional actions of stimulus packages and bailouts, we will update you on some technical information.

President Bush signed into law The Worker, Retiree, and Employer Recovery Act of 2008 on December 23rd, 2008. The new law grants a temporary waiver of Required Minimum Distributions from retirement accounts for the 2009 year only. Clearly, this provides relief for those who need to take the minimum distributions and will give the equities in the investment accounts an opportunity to recover. Furthermore, if you were taking monthly withdrawals from your retirement accounts simply to satisfy your Required Minimum Distribution, it may be prudent to suspend those for this year to avoid unwanted income taxes. At this time, it is expected that Required Minimum Distributions will continue in 2010.

“So, although this decline is different in many ways from other declines, it is also the same in the way it is moving through the cycle. We feel that each week that goes by more indicators are flipping to the argument that this oversold condition may begin to correct to the upside. And keep in mind that in the first 40 days of a new bull market, stocks typically regain a third of what they lost during the bear market.”

The Advisor - Fall 2008

The stock markets continue to attempt to digest the daily barrage of new information stemming from the credit crisis, current economic reports, testimonies on Capitol Hill by economic experts, and the current political backdrop. As if that wasn’t enough, recent conversations with money managers we use indicate the untimely liquidation of large hedge funds has significantly added to the volatile trading we are seeing in the stock markets.

After one of the wildest weeks in the history of investing, we feel it is not necessary to try to re-hash the causes of the volatility. We do think it is necessary to reiterate that while the particular circumstances of financial crisis invariably differ, the outcomes tend to be fairly similar. In sharp market declines, bottoms usually are punctuated by panic selling. We think if this past week didn’t fit that description, it was very close. Federal, and in this case, world governments responded aggressively to the crisis. During this period, business’ and even banks fail in the process. This is a normal and healthy part of business. As illustrated in the graph below, stocks eventually reverse course and the economy and confidence improves.

At the most volatile and fearful leg of an investment cycle, an investor is left with two choices: a.) Liquidate equity positions and move to interest bearing CD’s or money markets in an attempt to stop the bleeding, or b.) Look at your portfolio for diversification, and if adequate, maintain your position and wait until the panic recedes and attention turns back to market fundamentals.

Every time our Congressional leaders get a chance to show they can work together for the good of the country they find a way to screw it up. Yesterday, both parties failed to hold up their part of the vote for a package to ease the banking credit crunch. Between the biting partisan speech that Speaker Nancy Pelosi gave on the floor, and the childish republicans changing their votes in protest, our so-called leaders demonstrated again where their interests lie. Many are more concerned with their re-election. Of the 18 congressional incumbents that are in close races this November, only 3 voted for the proposal.

For the second time this decade, a major cleanup of corporate mismanagement and greed is in the works. In 2002, it was the accounting scandals that destroyed household names like Arthur Anderson and Enron. Today the mismanagement of risk and the allure of short-term gains has taken the 158 year old Lehman Brothers firm, Merrill Lynch, and possibly AIG Insurance Company.

Recently, our research into stock and bond markets’ performance with respect to mutual fund cash flows produced some interesting results we thought to share with you. Simply put, mutual fund inflows are when people buy the funds and conversely, outflows are when people sell. The accompanying chart is a 10 year graph of the S&P 500 Index and Lehman Brothers Aggregate Bond Index through the end of July 2008.

Diversify your 401(k) plan. You have heard it before, but we will say it again. Don’t leave too much money in your company’s stock, or any stock for that matter. Studies continue to show that employees are letting their 401(k) plans remain overly concentrated in their company’s stock.

The Advisor - Summer 2008

The American Association of Retired Persons (AARP) has recently reported that lenders offering reverse mortgages are abusing consumers. Homeowners using reverse mortgages borrow against the equity of the house and receive payments from a bank. The loan is repaid with interest when the house is sold or when the borrower dies. The report found that although nearly 50% used the proceeds to pay down home equity debt, a whopping 38% planned on using the payments for extras. Consumers should be very wary of anyone attempting to sell them something and suggesting they use a reverse mortgage to pay for it.

The Advisor - Winter 2008

The bottom line again is greed taken to the extreme. Suffering this time will not be limited to the pros or the wealthy. Ordinary investors, who got sucked into the frenzy of the private equity plays, or even junk bond mutual funds, will feel the pain before this is over. We feel that quality investments with good business models will come through this emotional upheaval well and will actually attract money as it moves from investors fleeing the current trouble sectors.

The Advisor - Summer 2007

Near term there are concerns of the higher risk sub-prime market imploding if interest rates keep rising. The financial sector , which has enjoyed an exceptional fun over the past few years, looks to be near the end of its run. Financials now make up 20% of the S&P 500 Index and have held the top spot longer than any other sector. Its cycle is most likely nearing the end.

Continue to invest regularly while trying to avoid the negative media and we will continue to identify exceptional managers and guide you towards your goals.

The Advisor - Winter 2006

As usual, it took the refocusing on the better than expected earnings reports from corporate America to turn the markets in the positive direction. The fact that the inflation numbers leveled off, which prompted the Federal Reserve Board to not raise interest rates in August, also helped. Whenever market fundamentals are healthy, attention must eventually turn to them and the markets will rise accordingly.

The Advisor - Fall 2006

2005 was similar to previous flat market years when active management outperformed the static indexes. Small and midsized companies along with their international counterparts led the surge in prices versus the large companies.

The Advisor - Spring 2006

Much of the success of these portfolio allocations will depend on the ability of the retirees to avoid the mass moves, by emotional and uniformed investors, out of the markets during a decline and jumping in at high points of euphoria. The selection of experienced portfolio managers along with disciplined asset allocation is vital to the overall stability during the market cycles.

The Advisor - Fall 2005

The frenzy surrounding real estate investing is not much different than what occurred in the late nineties with the Dot.coms and day traders. Each time the popular trend surrounded a very hot sector over a relatively short period of time.

The Advisor - Summer 2005

Following a less than spectacular first month of the year, February rolled back to bring the year close to even as measured by the Market Indices. This muddling along action is quite common after a year in which the equities rebounded nicely from lows.

The Advisor - Spring 2005

Congress recently approved a tax relief package to extend three popular middle-class tax cuts over the next several years.

The Advisor - Fall 2004

As stock market gains return to their long-term norms, there are always those who are not satisfied and look for alternative ways to do better. Promoters are more than will to design strategies to attempt to do so and, more often than not, separate you from your money.

Continue to be smart with your money, methodically add to your investments if you are still in the growth mode, watch your debt since interest rates will most likely rise as the economy heats up, be wary of greed as market values increase and re-allocate some profits off of the big gainers to the other sectors in your portfolio.

The Advisor - Winter 2004

Imagine if this cycle of volatility and chaos ended just as all previous cycles have in the resumption of opportunity and growth, which surpasses all in the past. Just imagine.

The Advisor - Winter 2003

The media loves disruptions and works very hard to elevate turmoil to keep the public interested in their reporting.

The Advisor - Winter 2003

Simply put, diversification is the conscious decision to not achieve the highest returns in exchange for not achieving the lowest returns. This is an emotional decision that is tested to its limits during extreme up and down periods. Those whose conviction holds true are ultimately rewarded in the end.

The Advisor - Summer 2002

…allocating assets between proven investment managers coinciding with your needs and goals, helps us through these cycles while avoiding emotional decisions.

The Advisor - Spring 2002